Emergency Home Repair Loans: Local Government as Financial Bridge

Community and Economic Development – Blog by UNC School of Government

https://ced.sog.unc.edu

Emergency Home Repair Loans: Local Government as Financial Bridge

By Tyler Mulligan

Published November 26, 2024

While the response to Hurricane Helene continues, local governments are looking ahead to the long road to recovery. In a report issued by the North Carolina Office of State Budget and Management (OSBM), Hurricane Helene Recovery Recommendations: Preliminary Damage and Needs Assessment, OSBM notes that successful recoveries in the past have managed to “quickly mobilize significant, flexible capital and proactively invest in local capacity and expertise to support post-disaster efforts.” (p. 12)

The investment in home repair following Helene will be substantial. OSBM reports that the U.S. Small Business Administration (SBA) has registered thousands of homeowners and renters for low-interest disaster loans, and more than 200,000 households are expected to apply for individual assistance. (p. 25) OSBM estimates that the region has suffered more than $12.2 billion in damage across more than 120,000 homes. (p. 25) Less than 10% of affected owners reported having flood insurance—meaning private insurance will cover only a small fraction of repair costs. (p. 27) Government aid, philanthropy, and owners will need to cover the rest.

If past recovery efforts are any guide, there will be a significant time lag before federal disaster recovery funds start flowing. OSBM reports it took nearly two years after Hurricanes Matthew and Florence for the state to receive disaster recovery block grants (CDBG-DR), “yet, recovery needs to start immediately.” (p.33) The advantage this time around is that the NC Office of Recovery and Resiliency (NCORR) is already in place, whereas that office had to be created after Matthew and Florence. Regardless, State-led efforts will require time to stand up.

There are some federal programs already up and running. Federal programs for individuals and households are described here. However, the U.S. Small Business Administration (SBA), which is the primary source of low-interest loans for home repair after disasters, has no funding at the time of this writing. The SBA disaster assistance website laments that “new loan offers will be delayed due to a lapse in Congressional funding.”

Congressional leaders hope to remedy the situation, but delays in federal aid may prompt some local governments to serve as a financial bridge, providing temporary financing for home repairs today until some future time when outside funding will flow. This post describes the legal authority and practical considerations for local governments seeking to serve in the role of financial bridge.

For ease of review, the post begins with a summary of the major legal considerations described in this post. Following the summary is detailed analysis of each major legal consideration. The post concludes by offering practical advice for local governments that endeavor to serve as a financial bridge.

Summary of federal and state law considerations

Below is a summary of the major points from this post. Detailed legal analysis of each point follows after the summary.

• Structure local aid as a loan program to avoid “duplication of benefits” under federal rules
  • A duplication of benefits occurs when someone receives disaster assistance from multiple sources for the same recovery purpose, and the total assistance received for that purpose is more than the total need. Federal aid is reduced when there is a duplication of benefits.
  • The structure of disaster assistance is relevant to duplication determinations. Grants and forgivable loans create a duplication under current rules. The following do NOT create a duplication of benefits under current rules:
    • Private loans at fair market rates;
    • Short-term, low-interest loans (so long as they are not forgivable).
  • With uncertainty about how future rules will handle duplication, this post assumes that local governments will structure their programs as short-term, low-interest loans.
• North Carolina Constitution: Tailor the loan program for the immediate emergency.
  • In a formal 1999 opinion, the NC Attorney General reviewed a disaster recovery loan program and opined that the loan program serves a constitutional public purpose when it is properly tailored to address the immediate emergency. That is, a loan program should be limited to those who:
    • “suffered substantial damage as a consequence of the disaster” and
    • “have not otherwise been fully compensated for that damage.”
  • In non-emergency situations, local government housing loans are authorized “only when the planning, construction, and financing of residential housing is not otherwise available to ‘persons and families of low income’” due to “the inability of private enterprise and investment, without assistance, to meet that need.” Further, in non-emergency situations, assistance is limited to those earning moderate income or below.
• North Carolina Statutes impose income eligibility requirements on borrowers
  • Receipt of federal or state funding does not imply legal authority to engage in the funded activity—an enabling general statute or charter provision is required.
  • Emergency rehabilitation loan programs are authorized by G.S. 160D-1311.
    • Loan program must be “principally for the benefit of low- and moderate-income persons” (LMI persons) earning no more than 80% of area median income (AMI).
    • Conservative approach would exclude higher-income individuals; in any event no less than 70% of the funding should be devoted to LMI persons to match federal CDBG requirements.
    • Counties must hold referendum if state or local revenues are used to fund the rehabilitation loans, unless county population is 400,000 or more. No referendum is required for cities.
  • Emergency loans for construction of new housing are authorized by the Housing Authorities Law (G.S. Chapter 157)
    • New housing financed with a local government loan must be reserved for LMI households earning no more than 80% AMI, or
    • if one or more units serve households earning more than 80% AMI, then at least 20% of the units must be reserved for the “exclusive use” of those earning 60% AMI or below, and all government subsidy must flow only to income-eligible households.
    • Local government must designate itself as a housing authority.
    • County referendum required if state or local revenues used. No referendum is required for cities.

Detailed legal analysis on each of the summarized points is provided below.

Employ loans—not grants—to avoid “duplication of benefits” issues

OSBM’s estimate of the unmet need that will remain, even after federal disaster aid is distributed, exceeds $6 billion. This amount is so substantial that local governments need to make every penny count. They simply cannot afford to lose federal funding inadvertently due to poor program design. Accordingly, local government programs should account for federal rules prohibiting “duplication of benefits” (or DOB) from other sources. Under DOB rules, eligibility for federal benefits is reduced to the extent that a household has already received benefits from other sources, such as local government aid.

“A duplication occurs when someone receives disaster assistance from multiple sources for the same recovery purpose, and the total assistance received for that purpose is more than the total need.” 84 FR 28836. The structure of local aid—whether in the form of a grant, loan, or forgivable loan—matters when determining whether the local aid creates a “duplication of benefits” with federal aid.

Each federal disaster recovery program is approved by Congress separately after each disaster. The program parameters and rules are not known for certain until Congress appropriates the funding and the appointed agency (usually HUD) establishes the program. The rules for evaluating “duplication of benefits”(or DOB) for past federal disaster recovery programs are found here. NCORR describes the duplication review process it used for past programs here. These past programs can give us a general idea—but not certainty—of how future programs might be structured.

Grants and forgivable loans = duplication

Under current rules, locally-provided grants and forgivable loans can create a duplication of benefits with federal aid. [Note: some past federal disaster aid programs have made an exception for forgivable loans; an example is described in the DOB Notice here]. At the time of this writing, it is not known how forgivable loans will be handled for duplication of benefits determinations for Hurricane Helene disaster aid. As already noted above, we won’t know for certain until Congress appropriates funds and the rules are established. Because we are unlikely to know the applicable rules until months after a disaster occurs, the remainder of this blog post will assume that local government disaster aid will be structured as loans (not grants and not forgivable loans) in order to avoid duplication of benefits issues.

Private (non-governmental) loans do not create a duplication

Federal rules promulgated in 2011 (76 FR 71060) indicate that private (non-governmental) loans to individuals or businesses do not create a duplication of benefits, so long as they meet the following criteria:

1. they are non-Federal loans (neither direct nor guaranteed by the Federal government);
2. they are made in a commercial lending transaction with a willing borrower and willing lender
3. they represent “fair market rates”;
4. they contain standard commercial lending terms in which the borrower must repay the full amount of the loan; and
5. they are not forgivable loans (emphasis added).

Private loans contain no subsidy, and they do not create a duplication of benefits issue. This means that individuals who obtain private loans today are neither surrendering nor reducing the amount of federal aid they can receive later.

Short-term, low-interest (subsidized) loans do not create a duplication

What about subsidized or low-interest loans for home repair? The issue is addressed in two notices published by HUD on June 20, 2019, related to duplication of benefits for Community Development Block Grants – Disaster Recovery (CDBG-DR): 84 FR 28836 (June 2019 Duplication of Benefits Notice, referred to herein as the “DOB Notice”) and 84 FR 28848 (June 2019 Duplication of Benefits Implementation Notice).

Section V.B.2 of the DOB Notice states the following rule regarding Short-term subsidized loans for costs later reimbursed with CDBG-DR: “Federal [rules] governing CDBG-DR grants generally permit grantees to reimburse costs of the grantee or subrecipient for eligible activities on or after the date of the disaster. If the grantee or subrecipient obtained a subsidized short-term loan to pay for eligible costs before CDBG-DR funds became available (for example, a low-interest loan from a local [loan] fund), the reimbursement of the costs paid by the loan does not create a duplication.” [emphasis added]

Accordingly, key factors in determining whether a person can be reimbursed with CDBG-DR for repairs or other “eligible activities” that were financed with a “short-term subsidized loan” are:

• the repair or other activities are eligible (usually indicating they repaired damage from the disaster);
• the activities occurred after the date of the disaster;
• the financing was “short-term” (short-term is undefined in the notice but can be reasonably understood as requiring repayment of principal (and interest, if applicable) after a period that allows for the borrower to seek federal aid); and
• the loan was obtained to pay for eligible costs before CDBG-DR funds became available.

Local governments should advise impacted households to keep careful records of repairs made and associated costs paid with proceeds from a short-term subsidized loan. Those records will be used to calculate the household’s disaster recovery benefits later, after a federal program is established.[1]  

Local government legal authority to offer home repair loans is limited under state law.

North Carolina Constitution

Analysis of local government legal authority begins with the state constitution. The North Carolina Attorney General (AG), in a formal opinion dated December 13, 1999, on the topic of Proposed Disaster Relief Programs, examined whether the state constitution allows the General Assembly to provide disaster aid in the form of low-interest loans to individuals (including higher income individuals and businesses[2] who suffered substantial damage) and opined that it was permissible.

The opinion noted the state constitution’s provision that “one of the first duties of a civilized and a Christian State” is to aid the “poor” and the “unfortunate.” The AG concluded that aid to individuals in need can serve a public purpose under the North Carolina Constitution, provided the program is properly tailored to address the immediate emergency. The example provided in the opinion said that aid should be limited to those persons who “suffered substantial damage as a consequence of the disaster” and “who have not otherwise been fully compensated for that damage.” The courts view AG opinions as instructive but not binding; nonetheless, this AG opinion provides a solid starting point when thinking about constitutional limits following a disaster.

In non-emergency situations, housing loans serve a constitutional public purpose only when they are necessary; that is, “only when the planning, construction, and financing of residential housing is not otherwise available to ‘persons and families of low income’” due to “the inability of private enterprise and investment, without assistance, to meet that need. Martin v. N.C. Hous. Corp., 277 N.C. 29, 49, 50 (1970). Furthermore, loans and other aid for higher-income individuals is not permitted. Additional nuance, including the constitutional treatment of moderate-income households in non-emergency situations, is discussed in a prior post on local government support for privately-owned affordable housing.

North Carolina General Statutes

The state constitution provides that a local government may only engage in activities for which it has been granted statutory authority. Receipt of federal or state funding does not imply legal authority to engage in the funded activity. G.S. 160A-17.1 authorizes local governments “to accept grants-in-aid and loans from the federal and State governments and their agencies” for projects and activities “which such city or county may be authorized by general law or local act to provide or perform.” (emphasis added)

Thus, a state budget appropriation or federal grant to a local government does not provide independent authority for the funded activity; the local government must identify existing statutory or charter authority for it. The federal government recognizes this and advises state and local governments to compare federal requirements with those at the state level and then follow the most restrictive rule. 24 CFR § 570.480.

Unfortunately, there is no “emergency home repair statute” upon which local governments can rely following a disaster. Rather, local governments must utilize existing housing statutes to provide emergency loans. Two statutory schemes are available—one for rehabilitation loans and one for new construction loans—and they are limited in different ways as described below.

1. Income Limits for Emergency Rehabilitation Loans

Local governments possess statutory authority to engage in community development programs and activities, to include “[p]rograms of assistance and financing of rehabilitation of private buildings principally for the benefit of low- and moderate-income persons.”  G.S. 160D-1311(a)(1) [emphasis added]. A home repair loan program would be a form of “assistance and financing of rehabilitation of private buildings.” Such loan programs are therefore authorized by G.S. 160D-1311 so long as the programs are principally for the benefit of low- and moderate-income (LMI) persons.

Low-income persons are defined in the statutes as those earning 60% of the area median income (AMI) or less. G.S. 157-3(15a). Moderate-income persons are defined by referring to the income requirements for “federal housing assistance of any type predicated upon a moderate or low and moderate income basis.”  G.S. 157-3(15b). In federal housing and community development programs, including CDBG-DR, moderate income is defined as households earning no more than 80% of the area median income (AMI).[3]

Some federal disaster recovery programs in the past have made higher-income individuals eligible for disaster aid. This doesn’t change the definition of moderate-income—it merely makes higher-income households eligible for the program alongside LMI households. Even when federal rules make higher-income persons eligible for a program, state statutes can impose stricter rules. In the case of housing rehabilitation, G.S. 160D-1311(a)(1) states that community development programs are authorized so long as the program is “principally for the benefit of low- and moderate-income persons.” By implication, a program that is “principally” for the benefit of LMI persons need not be exclusively for their benefit.

What is the meaning of “principally for the benefit” of LMI persons? It is reasonable to rely on federal CDBG regulations for guidance because G.S. 160D-1311’s predecessor statute was originally enacted in 1975 to authorize cities and counties to participate in the CDBG program.[4] Federal law mandates that “not less than 70 percent” of CDBG funds “shall be used for the support of activities that benefit persons of low and moderate income.” 42 USC 5301(c). This has also been referred to as the 70 percent (70%) test, LMI benefit test, or overall benefit requirement. 24 C.F.R. § 570.200(a)(3). Expenditures that count toward the benefit test include amenities that meet the “area benefit activity” test. An area benefit activity is an activity which is available to benefit all the residents of an area which is primarily residential, where at least 51 percent of the residents are LMI persons. 24 C.F.R. § 570.208. Examples of “area benefit activities” include acquisition of land for a neighborhood park, construction of a health clinic, improvements to public infrastructure like the installation of gutters and sidewalks, and development of a community center.

Will federal aid for Hurricane Helene include higher-income individuals among eligible beneficiaries? As already noted above, we don’t yet know what will be authorized for Hurricane Helene. In the past when HUD has authorized higher-income persons to benefit from CDBG-DR, it has also imposed restrictions to ensure that the 70% LMI benefit test is met, such as requiring all LMI households to be paid first, or by authorizing higher-income households to receive benefits only when they qualify for a “hardship exception” (see, for example, section V.B.3 of 84 FR 28836).

Regardless of the federal requirements, North Carolina statutes seem to authorize an emergency loan program, to include housing rehabilitation loans for higher-income households, so long as the program is “principally for the benefit” of LMI persons. A conservative approach would provide loans almost exclusively to LMI households, and in any event would ensure that at least 70% of the funds in the program are reserved for LMI households to remain consistent with CDBG rules. It bears repeating that, in a non-emergency situation, offering loans to higher-income households would not be permissible as explained above in the section on the state constitution.

2. Income Limits for Emergency New Construction Loans

Some housing was so damaged from the storm that it cannot be repaired or rehabilitated,[5] so a local government may wish to create an emergency loan program for new construction. The only statutory authority for loans for new housing construction is found in the Housing Authorities Law (G.S. Chapter 157). G.S. 160D-1311 described above authorizes local governments to offer rehabilitation loans only as part of a community development program. The Housing Authorities Law is far more versatile: it enables local governments to create loan programs, and it also authorizes financing for an individual housing project (apart from a program), whether the project involves rehabilitation or new construction, and whether it is part of a federal community development program or not. G.S. 157-3(12)(d). However, financing is authorized only for housing that is reserved for LMI households earning no more than 80% AMI.

What about offering loans for housing that serves a mix of incomes? Under the Housing Authorities Law, whenever one or more units in a development will serve households earning over 80% AMI, the development may receive a local government loan only if 20% of the units are reserved for the “exclusive use” of low-income households earning no more than 60% AMI. G.S. 157-3(12), G.S. 157-9.4. Any government subsidy must flow only to low-and moderate-income households.

Housing Authorities Law requires the local government to designate itself as a housing authority before using the powers. The statutory requirements described in this section, which apply whether under emergency conditions or not, are discussed in greater detail in the aforementioned post on affordable housing.

3. County referendum

Counties with populations below 400,000 must hold a public referendum prior to using state or local revenues for repair or rehabilitation loan programs. G.S. 160D-1311, G.S. 153A-149(c)(15a). No referendum is required for counties over that population threshold. All counties must hold a referendum prior to using state or local revenues for a loan program for new construction. No referendum is required when a county utilizes federal funds or private donations for these activities. Cities were originally subject to the same referendum requirements, but an exception was made for sales tax revenue in 1983 and then the referendum requirement was removed altogether in 1985. These mandates are discussed in greater detail in the aforementioned post on affordable housing.

Practice Tips for a Home Repair Loan Program

On a practical level, a local government home repair loan program should address the following elements as a minimum:

• Borrower Eligibility. Consider imposing borrower eligibility requirements on two bases: minimum repair cost and maximum household income.
  • Minimum repair cost: There are administrative costs and time involved with every home repair loan. In order to avoid small loans and to prioritize households with the most severe damage, a local government may wish to set a minimum repair cost that is eligible for a loan.
  • Maximum household income: The statutory income limits were described earlier in the post. A local government with limited resources may decide to focus on lower-income households only. Setting a lower income limit than allowed by law is permissible. A local government may not impose unconstitutional eligibility restrictions (such as race or religion) and must have a rational basis for any eligibility restrictions it establishes.
• Loan Structure.
  • Maximum loan amount. Determine the maximum loan amount available to each borrower. Banks often set the maximum loan amount based on the value of the borrower’s collateral. A local government loan program might impose a maximum loan size as a means of conserving limited resources and assisting more residents.
  • Payment structure. The loan program should establish payment terms. Will the loan have a period of deferral (no interest or principal payments due, with interest rolled into the principal each month)? Will it have a period of “interest only” payments before the outstanding principal is converted into a fully amortizing loan?
  • Amortization period. An amortizing loan is familiar to most individuals who have a home mortgage. An amortizing loan involves a set payment amount on a schedule that will pay down interest and principal such that the principal is reduced to zero by the last payment. Longer amortization periods make monthly payments lower.
  • Maturity date. The borrower must pay back the loan in full on the maturity date. Regardless of the payment structure and amortization period, a loan could still have a short-term maturity date, such as one or two years. If the borrower doesn’t have adequate cash to pay back the loan by the maturity date, then the borrower would be expected to find new financing in order to satisfy or “take out” the maturing loan. In order to avoid a “duplication of benefits” (DOB) issue, a local government may wish to set a maturity date within five years or less to ensure that the loan is viewed as a “short-term” loan for DOB purposes.
• Security or collateral. Private loans are typically secured with some form of collateral provided by a borrower, such as a lien on real estate. The lien is filed at the time the loan is made. In the event of default by the borrower, the lien allows the lender to sell the collateral and use the proceeds to offset any amount still owing on the loan. Sometimes collateral will have multiple liens for multiple loans, and each lien has a specific priority. The first lien has the highest priority—if the collateral must be taken and sold to satisfy a loan in default, the first lien gets paid first when the collateral is sold. A second lien has second priority—meaning, it gets paid with anything remaining after the first lien is satisfied. A loan secured by a second lien thereby carries higher risk than a loan with a first lien and, as a result, typically carries a higher interest rate than the loan with a first lien.
• Loan servicing considerations. Determine which local government department will be responsible for tracking loans, collecting payments, sending default notices, and following up on collections. Check whether the local government already possesses this capacity in-house or whether the local government needs to contract with a loan servicer (as described in a post here).
• Loan committee. A loan committee, made up of skilled officials and supported by professional expertise, should be charged with reviewing loan applications, repair estimates, and construction plans to ensure they are realistic. Some local governments contract with community-minded financial institutions to manage their loan programs (as described in a post here).
• Legal documentation. Every loan should be evidenced by a fully executed promissory note. An example of a promissory note utilized by the North Carolina Housing Finance Agency can be found here. In addition, it is highly advisable for every loan issued by a local government to be secured. A conventional form of security or collateral for a loan involves execution of a lien on the borrower’s property, such as a deed of trust (Fannie Mae form here).
• Public records. Loan documents in the hands of the government (or nonprofits they control) are public records.

[1] CDBG-DR disaster aid is often paid as a reimbursement for costs that have already been incurred by a person, regardless of how the person handled procurement. It should also be noted that federal procurement rules do not apply when federal assistance is made in the form of a loan. 2 CFR 200.101 (Uniform Guidance “Applicability”).

[2] The legal analysis for business disaster loans is different from individuals under state law, as described in these 2020 blog posts: Local Government as Lender: Emergency Loans for Small Businesses and Local government support for small business recovery and reopening.

[3] HUD explicitly defines “Low- and moderate-income persons” as members of households with incomes equal to or less than the Section 8 low-income limit set by HUD. 24 C.F.R. §570.3. The Section 8 low-income limit is 80% of the local area median income.

[4] North Carolina Legislation 1975, ed. Joan G. Brannon (Chapel Hill, N.C.: UNC Institute of Government, 1975), 51–52 (explaining that the predecessor statute to G.S. 160D-1311 was enacted in 1975 to address “uncertainty” about the authority of cities and counties to participate in the CDBG program authorized by the Housing and Community Development Act of 1974).

[5] See the North Carolina Rehabilitation Code for a definition of rehabilitation.